There Were 'Significant Bright Spots' Amid CarMax's Mixed Results

CarMax, Inc (NYSE: KMX) reported disappointing FQ2 results. There are a few “highly significant developments” that are “bright spots” in the company’s below-expectations results, Deutsche Bank’s Rod Lache said in a report. He maintained a Hold rating on the company, while raising the price target from $65 to $66.

CarMax reported its quarterly EPS at $0.84, missing the DB estimate of $0.86 and the consensus expectation of $0.88. The company did experience a slight volume recovery versus flattish comps over the past three quarters, and expectations were too high, analyst Lache noted.

Bright Spots

Lache enumerated two bright spots:

• #1: Non-Tier 3 sales, mostly comprising of Prime, grew 8.1 percent y/y

Growth in Prime could indicate a move of New car customers to Used, which would be a positive trend for CarMax.

Terming this as a significant trend, the analyst wrote, “…this phenomenon [of new car buyers shifting to the used market] could provide a tailwind for a long time to come (as additional regulatory content is added to new vehicles). Second, we’d note that while Tier 3 sales provide incremental revenue and gross profit for KMX, a prime sale is much more profitable (i.e. $1,300)”

• #2: Gross profit per used unit came in at $2,160. Although this was flat y/y, it was higher than the DB estimate of $2,149, and suggested that volume growth was not driven merely by discounting, Lache stated.

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